It’s 5:30 am We’re sitting in an airport in London waiting for a flight to Dublin. Around us are bleary-eyed businessmen, catching the first flight to Ireland.
Yesterday, US stocks managed to catch a break. The Dow rose 282 points — or just under 2% — despite another 6% selloff in China.
US crude oil fell a bit. But it continues to trade above $30 a barrel this morning.
What goes up…
A headline in the Wall Street Journal last week caught our eye: ‘Stocks down again. Where’s the Fed?’
That question came up several times in Mumbai, where we recently spent time on a business trip.
We were interviewed by the Economic Times of India and by Bloomberg TV. They wanted to know what we were doing in India and what we thought was ahead for world markets.
Our reply took a familiar form…
‘What goes up must come down,’ we said in several different ways. ‘What goes up a lot goes down a lot.’
This did not seem to be rocket surgery; we expected no argument. But the financial media on the subcontinent — like its sidekicks and drinking buddies in other countries — can’t imagine it.
In the minds of junior journalists and senior economists, there is nothing inevitable about up and down. They think markets only go in one direction — up — subject to occasional setbacks and policy mistakes.
And the mistake they see is the Fed’s supposed ‘tightening’ of credit conditions.
Grizzly from hell
‘Wouldn’t you say that the Fed was premature in raising rates last month…in light of the hellish decline in equities since then?’ asked one reporter.
‘No. In the first place, we wouldn’t say the selloff has been “hellish” at all. So far, this bear market is no grizzly from Hell. It’s a cuddly panda. And the Fed wasn’t too early. It was too late.’
The problem with this response is that it requires far too much explanation. The financial media doesn’t have time for it. They want soundbites…preferably positive ones.
After a while, we got into the spirit of it. Forget nuance. Forget irony. Forget unintended consequences. This is show biz.
‘You ain’t seen nothing yet,’ we told one interviewer. ‘This is a retest of the correction of 2008…but worse. The world has taken on $57 trillion more in debt since Lehman Brothers collapsed. So we’ll see the Dow below 6,000 before this is over.’
Just between us…that was not a serious prediction. We are pretty sure the Dow will eventually go down substantially. But we have no idea when or how low it will go.
Context creates content. The financial media is part of the entertainment industry, largely financed by Wall Street. Don’t expect to get serious commentary or analysis from it.
Commentators are expected to provide simple, snappy analyses…with as few qualifications as possible. Emphatic. Confident. Unhedged and unhinged.
Our publishing partners in Mumbai called together some of their best customers for a more in-depth conversation.
The same questions arose, but we had more time to answer them:
‘The problem is debt. There is too much debt. That’s what happens when you lend for too long at rates that are too low. People borrow to consume…or to invest in things that don’t really make sense.
‘Then they can’t pay it back. That was the problem with all that subprime mortgage debt in 2007 and 2008. Today, we have student debt, auto debt, corporate debt, and government debt. The world added $170 trillion in debt over the last 20 years. But the world economy grew at about only 3% a year.
‘The interesting thing is the way this debt bubble originated with consumers and the finance industry in the US…then got shipped over to the exporters in China…and from China to its suppliers in Brazil and the other resource economies.
‘Now, the bad debt ball ricochets from one economy to the next.’
Test of nerves
We explained our hypothesis…
‘Markets are myth busters. For the third time this century, they are attacking the central financial myth of our time: that a group of PhD economists can succeed where generations of central bankers before them have failed…that they can manage a paper currency — and a whole world economy — without blowing themselves up.
‘Paul Volcker did it,’ we conceded. ‘But that was when the US had only a fraction of the debt it has now…and it was before the world economy had gotten hooked on debt.
‘Now, as soon as we get a serious downturn — and we’re not there yet — all central banks will panic and come out with more aggressive stimulus programs.’
We did not say so. But perhaps we should now: This phase — where central banks push up asset prices with experimental policies — is probably not over.
Markets will test the Fed’s nerves. They will test their mettle with falling stock prices and a recession. Then, the Fed will react. It is, after all, ‘data dependent.’
‘Just hold on. It’s going to be exciting. That is probably the only thing we can be sure of. It’s going to get more interesting.’
Tomorrow: Wait out the selloff in gold and cash? Or sit tight with ‘stocks for the long run’?
For Markets and Money, Australia